[Communique] December 2016 Nextier Power Dialogue

PREAMBLE
1 On Thursday, December 15, 2016, Nextier Power, through its initiative, Nigeria Electricity Hub, organised its monthly Nextier Power Dialogue to address the liquidity issues in Nigeria’s electricity value chain. The discourse was held at the Thought Pyramid Art Centre in Wuse 2, Abuja.

2 The guest speakers included Dr. Joy Ogaji (Executive Secretary, Association of Power Generation Companies), Engr. Musa Gumel (Managing Director, Independent Service Operator, ISO-TCN) and Kolapo Joseph (General Manager, North South Power). Patrick O. Okigbo III (Principal Partner, Nextier Advisory) moderated the discourse.

OBJECTIVES
3 The Nextier Power Dialogue aims to share knowledge, explore investment opportunities and generate ideas for policy formulation in the power sector. The key policy issues discussed at these event are articulated in a policy brief that will be shared with the Honourable Minister of Power and other sector leaders to help shape government’s policy responses.

4 It is designed that at the end of each Dialogue, government and private sector stakeholders in the power sector would have gained a deeper understanding of the issues discussed and, in turn, equipped to seek pragmatic ways to achieve sustainable development of Nigeria’s electricity market.

OPENING REMARKS
Joy Ogaji “Assessing the Challenges in Operating a GenCo, Given Current Market Consideration”

5 Joy Ogaji gave an overview of the Nigerian Electricity Market Stages and described the evolution of the four market stages referencing section 6 of the market rules. The stages include; the pre-transitional stage, the transitional stage, the medium term stage and the long term stage. She also explained that pursuant to NERC’s Order No. 136 dated 30th January 2015, The Transitional Electricity Market TEM, was declared on the basis that the CPs set out in Appendix 2 of the Market Rules for the operation of the Transitional Electricity Market (TEM) have been satisfied. The Transitional Electricity Market is defined as the Nigerian Electricity Market Stage when all Transactions are driven by contract and competition.

6 The implications of the Transitional Electricity Market declaration on Generation Companies (GenCos): Dr. Ogaji mentioned some inferences of the TEM on GenCos including:

• The big financial burden on the GenCos due to the failure of the promised 100% GenCo invoice settlement by the Nigerian Bulk Electricity Trading Plc, NBET
• The additional investments by GenCos with attendant high cost of capital
• Increased regulatory risk.
• Increased debt profile.
• GenCos were made to bear the brunt of this lack-luster performance on the part of NBET
• Regular and continued load rejection and its attendant impact on the machine with no room for compensation

7 Given the current market conditions, Dr. Ogaji also explained the major challenges facing the Generation Companies (GenCos). These challenges include:

• Gas Challenge/Lack of sufficient Gas Supply to Generate Power: Thermal power from gas and steam turbines accounts for 80% of Nigeria’s power generation, however Gas unavailability greatly hinders power generation in Power Plants. The availability of gas to thermal station for the generation power is therefore critical to achieve improved electricity supply. Also, the rising cases of pipeline vandalism and insecurity around gas producing and transportation assets have further diminished the supply of gas to generation plants and consequently resulted in reduced capacity generation.

• Market Liquidity Squeeze: Currently, GenCos are being owed over 400 billion naira for electricity generated and supplied. Due to the high market Liquidity squeeze, GenCos lack the necessary funding for their operations, acquiring spare parts and equipment for the power generation stations.

• Transmission Constraint: The transmission grid is understood to have a “wheeling capacity” of around 5,000 megawatts. However generation above the 5,000 megawatts may either be lost or rejected.

• Foreign Exchange Incursion: When the GenCos acquired the power assets, the exchange rate of the United States Dollar to Nigerian Naira was $1/N157. About three years down the line, the cost of the equipment needed to carry out repairs of turbines and associated auxiliaries remain the same on the international market but has increased by over 50% in the last three years. Given the fact that majority of parts and equipment procured by the GenCos are sourced from outside of the country, this has had significant impact on the GenCos purchasing power and inevitably on their ability to upgrade and maintain their various power plants. Furthermore, as at the time of paying for the power assets in 2013, some of the acquisition financing were sourced by the GenCos in dollars, to the knowledge of appropriate government and regulatory agencies.

• Regulatory Risks: Regulatory independence is key to private sector confidence in the power sector and has a significant effect on the ability of government to attract and sustain investments in the power sector

8 She also suggested some pragmatic solutions to the challenges facing the Generation Companies. Dr. Ogaji suggested that an urgent review of prevailing policies, orders and documents; an equitable distribution of market technical and commercial risks; liberalization of bilateral contracts and doing away with vesting contracts.

9 She concluded by explaining that the situation can only be saved if solutions are immediately implemented to address the issues mentioned above. Furthermore, she also mentioned that While the GenCos remain committed to the Nigerian project, this commitment can only be meaningful when the critical factors necessary for the continued existence and thriving of the GenCos and the power sector are addressed and fixed.

Engr. Musa Gumel “Evaluating the Technical Challenges in Dealing with an Insolvent market”

10 Engr. Musa Gumel, Managing Director, Independent Service Operator–Transmission Company of Nigeria was represented by Mr. Ben Ogbu. Mr. Ogbu started out by explaining that prior to the power sector privatisation, it was assumed that private investors would introduce funds in order to address the infrastructure challenges in the energy flow network. He further explained that power flows from generation to transmission and then to distribution where it is sold to the consumers. The support of the electricity market is the funds flowing back from the consumers through the distribution segment to the rest of the electricity value chain.

11 Mr. Ogbu reiterated that one of the major objectives of the privatisation exercise was to ensure that the system produces adequate revenue for the electricity value chain which is currently not happening. Also, the transmission network needs to be reinforced and some of the infrastructure need to be replaced.

12 Mr. Ogbu further explained that the major limitation of the Transmission Company of Nigeria (TCN), is the inability of Distribution Companies DisCos, to collect revenue for power distributed to consumers. He clarified that the expected funds required for the whole electricity value chain is supposed to be made available by the DisCos which is currently not forth coming. However, this situation affects the Generation Companies because they are not able to pay for gas and therefore cannot improve on generation.

13 Mr. Ogbu also explained that the Transmission Company of Nigeria TCN, currently makes N7.2 billion and are able to collect about 1.5 billion monthly which is very poor and not enough to pay salaries let alone improve transmission networks

14 He also reiterated that the Distribution Companies DisCos, pay only 26% of revenue collected to TCN which is relatively low and always in arrears. He urged the DisCos to do more in terms of collection and remitting funds to the Transmission Commission.

15 He concluded by suggesting that DisCos should increase their effort in collection and also urged that electricity consumers should be encouraged to pay their bills which will bring about improvement in electricity supply to them.

Kolapo Joseph “Evaluating the Nigerian Electricity Market from an Investor’s Perspective”

16 Kolapo Joseph, General Manager, Corporate Finance at North South Power began his presentation by stating that the power sector reform started in 2003 when the Power Sector Reform Act was passed. He also explained that three years down the line, the generation companies have invested capital and increased generation from about 2,000 megawatts to 4,000 megawatts and hit over 5,074 megawatts in February 2016

17 He also added that the culture and service delivery in terms of customer service and approach have greatly improved which the old PHCN did not have. Furthermore, he explained that the biggest challenge in the power sector today is the insolvent issue in the electricity market.

18 Mr. Joseph also mentioned some practical solutions that can be adopted to address the insolvent issues. These solutions include:

• Adoption of an Accountability Framework: Mr. Joseph explained that the electricity market needs a bankruptcy structure in which the government through the Nigerian Electricity Regulatory Commission NERC, makes it clear to the market participants that assets would be taken over from them if they fail to deliver on their promises.
• Bilateral PPAs: There is a dire need for an incentive structure for distribution companies that are performing.
• Recycling of Capital: He also explained that the capital used to raise the acquisition finance should be recycled and banks should switch the faculty from a loan to a guaranty. This process helps to reduce the pressure on the DisCos to pay back their loan and in turns reduces the possibility of the DisCos to servicing the debts with their revenue.

19 Mr. Kolapo Joseph concluded by stating that increase in tariffs alone cannot solve the problem and that investment in capital expenditure to reduce losses.

MODERATED DISCUSSION
The moderated panel discussion and audience participation raised a number of issues including the following:

20 Effectiveness of the Transitional Electricity Market: Dr. Ogaji explained using the market rules, that there are condition precedents CPs that needed to have been put in place such as gas availability to a particular volume, DisCos readiness in terms of metering and target which are yet to be actualized. She further explained that the Nigerian Electricity Regulatory Commission, NERC has not yet declared the readiness of the market to go into Transitional Electricity Market.

21 The Transmission Company of Nigeria TCN, Being the Weakest Link in the Value Chain: The audience was made to understand that the Transmission Company of Nigeria TCN, is collecting about 26% of their total revenue from the Distribution Companies DisCos, which is insufficient to improve their networks. Mr. Ben Ogbu also explained that TCN is developing their transmission network assisted by the Niger Delta Power Holding Company. He gave examples of the second line from Jos going to Kaduna and the transmission line that can pull out power from Afam VI towards Makurdi and Benin.

22 Practical Solutions: The Panellist at the December Nextier Power Dialogue acknowledged that there is a need for the regulatory body, NERC to be stern and take actions such as the requirement of DisCos to submit their accounts and transparency with their financials

23 Equitable Distribution of Risk: Dr. Ogaji explained to the audience that in any business environment, risks are usually handled by the best party that can handle the risks. She referenced the transmission use of system agreement which TCN signed with the Distribution Companies DisCos. She further explained that the losses from the rejection of load sent from TCN should be bore by the DisCos in line with the transmission use of systems agreement

24 Non-Enforcement of Contracts: The non-enforcement of contracts was clearly expressed by Mr. Sam Aiboni, member of the Council of Business Law. He explained that there are so many rules and regulations as well as legal options that can be adopted by the participants in the electricity value chain. However he urged stakeholders to go back to their books to solve the insolvent market issues.

25 Disconnection Between BPE and NERC: Engr. Akin Bada, former Special Assistant to the President and former Chief Executive Officer of TCN explained to the participants at the December Nextier Dialogue that there is a great disconnection between the BPE that privatised the power sector and NERC that regulates the sector. He further explained that NERC did not consult with BPE during the declaration of the Transitional Electricity Market TEM. He also urged BPE to follow up with a monitoring scheme to track the progress of electricity market.

26 Regionalizing the Transmission Network: Dr. Stephen Ogaji, Head of Gas, Niger Delta Power Holding Company of Nigeria NDPHC, asked for clarity on the issue of regionalizing power by TCN. Mr Ben Ogbu responded by explaining that individuals can sell to Distribution Companies DisCos, from any region of the country directly without going through the TCN transmission network in form of embedded or captive power

CONCLUSION
27 The December 2016 Nextier Power Dialogue agreed that serious actions are to be employed to improve bill collection by the Distribution Companies DisCos, as they play an integral role in the cash flow system of the electricity value chain. It was also established that Distribution companies should be transparent with their financial records and books for clarity. The federal government of Nigeria should also intervene by implementing practical policies for capitalising the electricity value chain and tariff calculations should be designed bearing in mind unforeseen risks.

28 The evening rounded up with a vote of thanks by Patrick Okigbo, Principal Partner Nextier who thanked the panellist, audience, members of the press, and Thought Pyramid. The upcoming dialogue will convene stakeholders in government, power companies, private sector investors, policy consulting firms, and individuals from related sectors to further discuss pragmatic solutions to these liquidity issues.